PG&E can handle big fine - report

SAN BRUNO BLAST

Updated 10:51 pm, Wednesday, August 29, 2012

Pacific Gas and Electric Co.'s parent corporation could absorb $2.55 billion in penalties stemming from the San Bruno gas pipeline disaster and still remain financially viable, according to a confidential report commissioned by state regulators.

The report does not suggest that PG&E Corp. be fined that much for the 2010 explosion and fire that killed eight people and destroyed 38 homes, but does say the company could survive such a sanction.

A fine of that magnitude would dwarf what PG&E has said it expects to pay for hundreds of violations that state regulators say the company committed before the disaster.

The California Public Utilities Commission hired Overland Consulting of Kansas to analyze PG&E's ability to pay after regulators accused the company of installing a substandard transmission pipeline under San Bruno, failing to maintain it properly, letting its pipeline system records fall into disarray and failing to track urbanization around its lines and adjust gas pressure accordingly.

Not released

The company delivered its report to the utilities commission and PG&E in May, but it has not been publicly released. The Chronicle reviewed the report on Wednesday.

"California's economy and our customers depend on and deserve a financially strong utility," he said. "We wholeheartedly disagree with that conclusion in the report, which is unrealistic and based on a flawed analysis."

In the 15-page analysis, Overland examined the finances of PG&E Corp., the holding company founded in 1997 as the utility's parent, and concluded the firm could sell $2.25 billion in stock to pay a fine. The company has already set aside $300 million from stockholders in anticipation of San Bruno-related penalties, the consulting firm said.

Biggest ever

The $300 million is more than PG&E has publicly disclosed. Company officials said earlier this year that PG&E expected to be fined around $200 million.

Even a fine of that size would be far greater than the largest penalty ever levied by the state against PG&E for gas-system violations. The highest fine to date is the $38 million that the utilities commission penalized PG&E for a 2008 pipeline explosion in Rancho Cordova (Sacramento County) that killed a homeowner.

The company is barred from using customers' money to pay fines, so PG&E stockholders would have to pay any sanctions the state imposes for the San Bruno disaster.

The utilities commission has scheduled hearings for late September on whether and how much PG&E should be fined for the San Bruno explosion and related problems. However, the commission and PG&E are also conducting settlement talks that would cut short that process.

Reducing dividend

In its report, Overland said PG&E Corp. could "raise significant amounts of equity" for a San Bruno fine by reducing dividend payments to stockholders.

"Ultimately, we agree with CEO Anthony Earley that, 'The company does need to be financially viable after (PG&E) is finished with all the issues related to San Bruno,' " the report said. "A financially healthy utility is in the best interests of all stakeholders, including the CPUC, PG&E customers and the company's stockholders and creditors."

The report added that PG&E "is currently in a stable financial position and has the ability to raise large amounts of capital," particularly through sales of stock, "without seriously eroding the company's current credit quality."

In addition to state fines, PG&E faces scores of lawsuits filed by San Bruno residents. Its chief financial officer said that as of mid-year, the company had set aside $455 million to settle civil litigation connected to the blast. PG&E says its insurer would pick up about $135 million of that.

The lawsuits are scheduled to go to trial in San Mateo County in January.

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